At the close of 2002, leaders in the beer world and industry analysts looked for an optimistic spin to put on a lackluster year. Several used the analogy of “the perfect storm” to describe the series of coincident factors that put a damper on business: bad weather, a stubbornly sluggish economy, and a looming war, added to the lingering uncertainty in the wake of the September 11th attacks.
But the “perfect storm” suggests an accumulation of events that build to a calamity, then recede. Analysts looked beyond 2002 with confidence, certain that good beer-drinking weather would succeed the bad, the economy would perk up, and the war in Iraq would be concluded swiftly. Good opportunities for beer lay ahead.
One year later, not much had changed. According to the just-released Adams Beer Handbook 2004, overall beer sales volume for 2003 was down 0.3%, with domestic beer volume decreasing 0.5% and imports moving ahead by 1.9%. Rather than a single cataclysmic storm that would pass, beer seems to be facing a long stretch stranded in the doldrums.
“It was not a great year for beer,” said Dave Eickholt, President of Diageo-Guinness U.S.A. “In fact, it’s been more than a year. The hope at the NBWA [National Beer Wholesalers’ Association] meeting last year in Las Vegas was that 2004 would be better than 2003. But it was a strategy based on hope, not a strategy based on strategy.”
Some individual brands performed very well, bucking the trend, and some beer categories were stronger than average. Weather, economics and war may have put a damper on growth, but they didn’t explain the whole picture.
“The best way to combat drunk driving is to target the hard-core repeat offender who is responsible for two-thirds of drunk-driving fatalities.”
— AUGUST BUSCH IV, PRESIDENT, ANHEUSER-BUSCH
More disconcerting to the business, beer’s competitors for consumer dollars — other alcoholic and non-alcoholic beverages — operating under the same market conditions, gained ground. And industry leaders appreciate that if these market conditions don’t tell the whole story, an improvement in these conditions won’t necessarily bring the beer business as a whole back to its former vigor.
Consolidation among wholesalers poses challenges to brewers and wholesalers alike. And global consolidation of the biggest brewing interests may be dividing the industry along two paths: a small club of very large international brewers and a diverse patchwork of small, local brewers.
THE LIGHTENING OF THE AMERICAN PALATE
One notable area of vitality in 2003 was light beer, which continues to grow at the expense of regular beer.
American consumers have a maddeningly inconsistent approach to diet and health: we super-size our meals, then wash them down with diet cola. Changes to healthier eating habits always carry a whiff of sacrifice that practically guarantees that the change is temporary — except, perhaps, in the realm of beer.
American mainstream lagers have grown steadily lighter in flavor and body in the years since the repeal of Prohibition. Foreign beer lovers deride the major American brands as lacking taste — even as they see the Bud family gaining in their own markets — but the fact is that the use of corn and rice to create these delicate, thirst-quenching beers has pre-adapted the American consumer to accept still lighter beers without much sense of loss.
Today, for many consumers, beers that are lower in calories aren’t so much a diet choice as a taste preference. Nearly half the beer sold in 2003 was light, when, clearly, half the beer drinkers were not on low-calorie diets. Light beer has become a painless concession that caters to our interest in healthier, more active lifestyles.
“The number one selling brand in the U.S., Bud Light, continues to be a source of growth for Anheuser-Busch,” according to August Busch IV, president of Anheuser-Busch.
For the Big Three brewers, the low-calorie brands (Bud Light, Miller Lite, Coors Light, Natural Light) grew or remained stable, while their full calorie siblings lost ground. “The decline in premium regular beers has been going on for a long time and that has primarily been because consumers have chosen lighter beer brands — moving to premium lights rather than premium regulars,” according to Busch.
LOW-CARB ENTERS THE MIX
But the dramatic growth belonged to the A-B newcomer that capitalized on the public’s new interest in counting carbs, not calories: Michelob Ultra.
“Introduced in the fall of 2002, Michelob Ultra — an innovative product — became the most successful new brand introduction in our industry in many years and quickly moved to a 3% share of total beer sales in supermarkets,” reported Busch. “Ultra continues to grow at a better than expected rate so far in 2004. Michelob Ultra and Bud Light continue to drive the growth for our company in the U.S.”
Indeed, in its second year, Michelob Ultra became the ninth highest-selling beer in the country, with 2.4% of the total market. For comparison, the micro and craft beer category, though enjoying better growth than many other categories, still had only about 4.5% of all beer sales.
Michelob Ultra’s success forced its competitors into action. SABMiller, after an initially fumbling response, seized upon the fact that Miller Lite — while low in calories — was also fortuitously low in carbs.
“There were notable and stellar examples of success in 2003,” said Diageo’s Eickholt. “The first bright spot was Michelob Ultra, with double-digit growth. And the turn-around in Miller Lite has been nothing short of spectacular. The success is a testimony to A-B and SABMiller’s ability to get it right with the consumer. They found solutions to topical concerns of consumers, and filled consumer need in a relevant and credible way.”
Anheuser-Busch is diversified enough that it could promote both Michelob Ultra and Bud Light — with ads for the latter even poking fun at overwrought concerns about carbs. Smaller players, however, couldn’t have it both ways, and were forced to decide between pushing low-cal or low-carb. Rolling Rock, for example, discontinued Rock Light, its light beer, in favor of Rock Green Light, which is both low carb and low calorie. Rock Green Light shipped 1 million cases in its first three months, a real success.
Adolph Coors, the smallest of the Big Three, had the biggest challenge. Coors Light was again the company’s best-selling brand with over six times the sales of standard Coors; a low-carb Coors beer couldn’t help but cannibalize Coors Light. But with A-B and Miller set to gobble the low-carb market in proportion to their overall market shares, Coors couldn’t sit back. Last spring, Coors launched its low-carb Aspen Edge, bowing to the inevitable.
The message is not lost on importers. Said Eickholt, “While imports have less direct development in the light category — the main consumer demand is for flavor — it’s not a contradiction in terms to have flavor in a light beer. Importers have been slower to get into the light game. Will it go as high as 45% [the percentage of light domestics]? Maybe not, but you shouldn’t expect light imports to stay at 10-11% [of the import market].”
Perhaps. Fuller-flavored low-carb beers, made from all-malt instead of barley malt, rice and corn, are a technical possibility, but may not suit the public’s expectation that a low-carb beer must be perceptively lighter than already-light mainstream beers. Several years ago, Boston Beer introduced a low calorie, all-malt beer from Samuel Adams, called Lightship, which failed precisely because it was too flavorful. Learning the lesson, Samuel Adams Light, launched last year to great success, is a less assertive beer.
IMPORTS MAINTAIN THEIR EDGE
Imported beers still have the cachet to justify their higher price, retaining about 11% of total U.S. beer volume in 2003, and about 17% of dollar sales.
In a move many observers found daring, number one import Corona raised prices. Its two importers, Barton Beers and Gambrinus, stuck to the pricing strategy, and discovered consumers were willing to stay with the brand. Heineken, in the number two position following Corona, did not follow suit on price.
The high Euro took its toll. “I can assure you it has hurt all the imports,” said Stephen Mittelhoff, Grolsch marketing manager for U.S. Beverage. “In the short term, it depends on your contract, and the larger brands can possibly weather this a little better, but in the long term it hurts the bottom line for everyone.”
Along with changes in currency exchange rates, imports faced increased freight costs, and longer processing times due to tightened security procedures.
Mittelhoff is aware of the performance of imports relative to other consumer beverages, since, in addition to Grolsch, U.S. Beverage handles both malternatives and a couple of U.S. craft beers. “In the whole import category, the economy is slow. We’ve felt the influence of spirits, and the hype of malternatives, which seems to be fading a little. It hurt more at a trade level, with a loss of attention there, not at a consumer level.”
At Diageo, Dave Eickholt oversees the beer brands within the world’s largest spirits company. In 2003, Red Stripe, the Jamaican beer, grew at double-digit rates, while Harp, another lager in the same general style, lost 10%. As with U.S. domestic beers, imports are almost all of the same international lager style and must grab consumer attention with image.
Eickholt explained, “The need is to impact retailers and consumers at the point of purchase. Red Stripe, in its stubby, ugly little bottle, really does stand out.”
The enduring success in the import lineup, however, is Guinness. The largest-selling stout in the world is also the only stout among the 50 top-selling beers in the U.S. Among the top 50 imports, there are 35 standard lagers; five light lagers; four dark lagers; four mid-range ales…and Guinness.
“The new news about Guinness in the past couple of years is draft in a bottle [referring to the nitrogen ‘widget’ that allows bottled Guinness to have the same creamy head as draft dispensed],” said Eickholt. For 35 years, Guinness was available only on draft, on-premise. That is not where Americans consume beer. Eighty percent of beer is consumed off-premise, but Guinness didn’t have a glass bottle product.
“American consumers have made it clear that they want imported beer in bottles. There are a few notable exceptions (Heineken, Foster’s), but imported beer in cans are rare. The secret is to make it easy for the consumer to consume in a form and place they prefer.”
WINNING “SHARE OF STOMACH”
Although demographic trends suggest that things should be going well for beer, other drinks categories are making inroads on beer’s territory.
David Rehr, president of the National Beer Wholesalers’ Association, borrows the following image from the beer industry’s internal competitions for consumer “share of mind.”
“We’re now facing competition for ‘share of stomach.’ It’s not just beer versus wine, or beer versus spirits. It’s beer versus New Age drinks, carbonated soft drinks as well as other refreshment products.
“My belief is that there is a long-term trend of trading up… Even if there are ups and downs from one year to another, there is a pattern of underlying growth.”
— JIM KOCH, PRESIDENT, BOSTON BEER
“The first step is to acknowledge that a problem exists. We know we have a great product, but we’ve fallen behind where we expected to be. The next step is to convince the consumer to choose beer over other products. For example, at the NBWA, we’ve been tying beer to food, and emphasizing beer as part of a healthy lifestyle.”
A wide range of choices may tempt the consumer away from beer, but distilled spirits — followed by wine — cause the most alarm. Of course, both beverage categories start out at much lower levels of consumption than beer, but the increases have been consistent, and the trends steadily upward.
The consensus is that distillers and vintners have managed to position their products as trendy and new, with innovations in flavors and packaging that only the flavored malt beverages (FMBs) have tracked within the field of beer.
Vodka, the beverage that exemplifies the threat from spirits for beer industry leaders, has been re-invented. There are products at every price point, original flavors and a sophisticated image.
Wine has also made strides with younger adult drinkers, beer’s accepted demographic group. Where vodka has expanded up-market into premium and superpremium brands and beyond, wine has become more approachable.
“When I visit retail accounts, I walk them over to the wine section,” said Eickholt. “There, prominently displayed is Yellow Tail. I say, ‘Do you think that Yellow Tail invented merlot or cabernet?’ Of course, they didn’t. They crafted a liquid, and crafted a package and price point that responds to an unmet consumer need.
“You can walk up and down the wine aisle and see packaging that brings new news to wine consumers who seem to have an unquenchable thirst for the new.”
That’s beer’s puzzle. “There’s not enough innovation in beer,” said John Chappell, senior vice president, marketing for US Beverages. “It’s hard. What people like about beer is its stability, tradition, and authenticity. Then people say you have to innovate; it’s kind of a dilemma.”
BIG GETS BIGGER
Critical to beer’s ability to be competitive is the relationship with wholesalers, which has changed dramatically with wholesaler consolidation.
At the top of the scale is Anheuser-Busch, whose exclusive relationships with wholesalers lead to effective execution that is the envy of the business.
According to August Busch IV, “We view our exclusive wholesaler relationships as a tremendous competitive advantage in the U.S. market. We estimate that SABMiller and Coors have only 2% of their volumes sold through exclusive wholesalers and over 50% of SABMiller’s volume is sold through shared Miller-Coors wholesalers. Since 1996, we have built our exclusive wholesaler network from 40% to 67% today. Having 67% of our volume sold through exclusive wholesalers marries the fortunes of A-B and the wholesalers in such a way that there is a unity of purpose or share of mind that cannot be matched by our competitors.”
Elsewhere, consolidation has required adjustment.
“If you’re not A-B, Miller or Corona, you have a problem getting enough focus from distributors. Everybody does,” said U.S. Beverage’s Chappell. “The issue is that, with consolidation, many wholesalers have lots and lots of brands.”
“Wholesalers are still very interested in high-end brands with growth potential. They’re very interested in different, innovative, unique brands that will bring in a return, but they really want you to do your homework before they take on a brand.”
Miller Brewing recently debuted new packaging for Miller High Life and Miller High Life Light.
Mittelhoff, the Grolsch marketing manager, has practical advice: “The biggest challenge for small brands is getting the attention of your distributor. We’re combining push with pull: asking our distributors for the right things, but also launching some media campaigns — TV spots in certain markets. With consolidation, as a smaller brand, you can ask for only one or two things from a distributor, so make sure you ask for things that will drive the brand.”
NBWA president Rehr makes similar points from the wholesaler’s perspective: “Brands with a particular niche don’t face a problem. If a supplier has a light beer, and a wholesaler already has seven light beers, that can be a problem. But if the supplier can identify a niche — ‘This is a light Czech-style beer that sells very well in a particular city with a large Czech-American population’ — you see what I mean.”
But wholesalers also feel pressured by consolidation, Rehr says. “Wholesalers find it difficult serving so many masters. Particularly in a multi-brand house, you can get different suppliers applying negative pressure. Positive motivation and rewards work better than punishment.”
Rehr reassures brewers that his members are receptive to adding brands. “With new products, I think there’s been some misunderstanding. Wholesalers are anxious to take them on, products with good margins.”
Despite setbacks, there is a confidence among industry leaders that, in the long run, brewers will figure out how to make beer the preferred beverage for the American audience, and that the trend is toward greater quality.
“It won’t get easier in spirits, wine or in beer, just by hoping it will. There is always something that weighs on the consumer…”
— DAVE EICKHOLT, PRESIDENT, DIAGEO-GUINNESS U.S.A.
If 2003 was a blah year in general for beer, Jim Koch, president of Boston Beer, felt otherwise. The micro and craft segment, of which his company is the Goliath, has shown growth second only to the import sector, yet Koch’s major success was in the year’s other growth category, light beer.
“2003 was a good year for Sam Adams. We consolidated the double-digit gains from the rollout of Sam Adams Light in 2002. The first half of the year, Sam Adams Light was gaining at the expense of other brands, and in the second half, the other brands gained at the expense of Light, so we had two trends that reversed in the middle of the year, sort of canceling each other out.
“My belief is that there is a long-term trend of trading up: as people drink less, they drink better. Even if there are ups and downs from one year to another, there is a pattern of underlying growth.”
John Chappell agrees, with muted enthusiasm. “High-end beer will come back, I just don’t know when. Individually, brands are all over the map. At the high end, drinkers are trading up. Over three or five years, we’re headed in that direction.”
Dave Eickholt adds a cautionary note: “It won’t get easier in spirits, wine or in beer, just by hoping it will. There is always something that weighs on the consumer — war, a bad economy, the situation in the Middle East. There’s always something that requires that we perform better next year than this, or we won’t sell any more beer next year than we did this year.”